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Appendix D: Update of the Estimated Earned Income Indicator

The Global Gender Gap Index utilizes a methodology originally developed by the UNDP Human Development Report Office to calculate the average income earned by women, relative to that of men, to create the Estimated earned income indicator included in the Economic Participation and Opportunity subindex. The indicator provides a hard data point on countries’ gender gaps in earnings, complementing the Wage equality for similar work indicator, which is derived from the World Economic Forum’s annual perception survey of business executives.

The first 10 editions of the Global Gender Gap Report featured an Estimated earned income figure that was calculated by using the Human Development Report 2007/2008 version of the UNDP methodology. The data used to calculate this indicator included female and male population figures, GDP PPP (current international $), labour force participation rates of men and women and mean nominal monthly earnings of employees.

In 2014, following extensive expert consultation, the UNDP Human Development Report Office changed its methodology for calculating women and men’s estimated earned income. First, GDP PPP was replaced by GNI PPP; second, the cap on maximum female and male income considered in the calculation was raised from US$40,000 to US$75,000,1 following Kahneman and Deaton’s findings that any earnings past that point have little or no further returns on psycho-social wellbeing.2

Our response to this change has been to follow suit on the rising of the cap, but retain the GDP PPP figures. This is designed to maintain comparability in the time series data of the Global Gender Gap Report, while shedding light on earning gaps, including in those countries where men, women or both sexes’ earnings were above the previous cap.

In last year’s edition of the Report, 22 countries had male Estimated earned income values capped at US$40,000 and eight—Brunei Darussalam, Kuwait, Luxembourg, Norway, Qatar, Singapore, Switzerland and United States—were in the position of having both male and female income capped. In this year’s edition, the total number of countries with Estimated earned income values capped at the US$40,000 level would have increased from last year’s 30 to a total of 33. Of these, 17 caps had come into effect in 2011.

The consequence of our methodological change for the 2016 edition of the Report has been a decrease in the score of 33 countries featured in the Index this year relative to a scenario in which we kept the former value of the cap. The effect of the methodological change is largest for Kuwait, Brunei Darussalam, the United States, Ireland, the Netherlands, Austria and Switzerland, in order of magnitude. The change is felt most strongly in the average scores of affluent regions such as the Middle East and North Africa, Western Europe and North America. The mean change in score is a decrease of 1% on the overall Global Gender Gap Index and 4% on the Economic Participation and Opportunity subindex.